In an announcement to Bursa Malaysia, SUPERMAX is venturing into the United States of America (USA) to manufacture medical gloves and other personal protective equipment (PPE), as well as building a National Headquarters there under phase one with an initial capex of USD350m (RM1.5b). We are concerned over the overseas execution risk and near-term oversupply situation due to expansion plans from new and existing players. Downgrade FY23E net profit by 38% after imputing lower ASP and margins. TP is reduced from RM1.95 to RM1.45 based on 12x FY23E EPS (at - 0.5 SD below 5-year pre-COVID forward historical mean of 15x). Maintain Market Perform.

Venturing into US. SUPERMX is venturing into US to manufacture medical gloves and building a distribution warehouse for other PPE located on a 215 acres land in Brazoria County, Texas with an initial 1st phase capital outlay of USD350m (RM1.5b). The 1st phase is expected begin construction by early 2022 and commercial production is expected by end-2022. The capex for phase one consists of the group’s North America Manufacturing Headquarter, a Research & Development Centre, a training centre, and a full-fledged employed facility centre. The total capex for the entire project is estimated at USD550m consisting of four phases with each phase expected to produce 400m pieces of gloves per month. Upon completion of all four phases, total installed capacity is expected to be 1.6b pieces/month or 19.2b pieces per annum (+73% of current capacity). With a net cash of RM3.2b as at 30 Sept 2021 we are not overly concerned about the funding.

Outlook. Over the next few quarters, the group is expected to face tough operating environment of falling ASPs and margins normalisation including potential loss of revenue in the US. Recall that CBP issued a Withhold Release Order (WRO) against SUPERMX, identifying 10 of the International Labour Organization’s indicators of forced labour in the latter’s manufacturing operations during its investigation. The group claimed that it had taken measures to meet the International Labour Organisation (ILO) standards on migrant workers since 2019. The group highlighted that it had on 11 October 2021 commissioned an independent international consulting firm to conduct an audit into the status of foreign workers in its manufacturing facilities. Note that the US accounts for approximately 20% of sales. The impact severity on earnings depends on: (i) how fast Supermax can replace loss of sales in the US, and (ii) how long it takes for the group to resolve the issue. Note that it took almost a year for TOPGLOV to be cleared of the ban. Due to over- ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre- COVID pricing considering that the cost structure has risen amongst others including social compliance costs.

Downgrade FY23E net profit by 38% as we reduce EBITDA margin to 19% from 29%, ASP to USD27 from USD28, and utilization from 80% to 74%.

Maintain MP. We cut our TP from RM1.95 to RM1.45 based on 12x FY23E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean). The PER is lower than the norm due to execution risk concern in its US ambition.

Key risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 20 Dec 2021